China’s dairy demand to increase over next two years, Rabobank

17 October 2013

Editorial

A report released by Rabobank states that China’s demand for dairy imports is set to increase over the next two years as the country’s local milk production struggles under structural change in the supply chain.

The report titled, China’s Raw Milk Supply: Still Dreaming of a White River, states that China, as the world’s largest dairy importer, is expected to be a key driver in global dairy consumption growth throughout the next decade.

“Milk production in China is struggling to grow as a result of small-scale farmers exiting the industry and large-scale farms still being under development,” says Asia Hayley Moynihan, co-author of the report and Rabobank director of dairy research.

“It is likely to be at least two to three years before the pace of large-scale dairy farm expansion in China outweighs the current contraction in ‘backyard’ sources and leads to a reduction in import growth.”

Moynihan says that the slowed growth of milk production in China has seen the country’s reliance on dairy imports grow between 20 and 30 percent per annum over the past two years.

“The surge in Chinese buying in a shrinking global supply pool of dairy has squeezed out many other buyers and held dairy prices at high levels,” Ms Moynihan says.

“Even when that rate of growth in imports slows, China will remain a major consumer of global dairy exports.”

A key reason as to why China’s milk production is struggling to grow with demand is due to inconsistencies in supply that has the potential to lead to food safety risks.

Sandy Chen, senior dairy analyst at Rabobank said that while domestic dairy production still accounts for 80 percent of consumption in China, this domestic supply is largely under-developed. Chen estimates that 60 percent of domestic supply originates from small-scale dairy farmers with typically less than 100 cows per farm.

“The cows are typically raised in backyards and fed on forage grown on-farm, however the quality of milk is very inconsistent,” says Chen.

Chen says that milk from smaller producers is typically ‘pooled’ at collection stations that act as middle men. “This structure has also heightened food safety risks along the supply chain,” he said.

However since the melamine contamination crisis of 2008 - which affected the health of some 300,000 people and resulted in the death of a number of infants - the Chinese government has taken a number of steps to resolve supply chain issues and strengthen raw milk quality control. This includes the introduction of a licensing and review system for milk collection.

Although the growth may be slow, the report states that domestic production will eventually catch up to meet local demand and that the reliance on key exports markets such as Australia will no longer be as strong.

“And it is important to recognise that the tide of local milk production will eventually rise over time and compete more strongly with imported product, albeit at a relatively high price point due to local production costs, ” says Moynihan.